Why the Irish Taoiseach has a vested interest in keeping the UK locked into EU economic structures

Why the Irish Taoiseach has a vested interest in keeping the UK locked into EU economic structures

The Irish Taoiseach, Leo Varadkar, has played a strong hand in the Brexit negotiations, bringing in both the Good Friday Agreement and any possible border friction, real or imagined, to try to keep the UK locked into the EU’s economic structure throughout any transition period and then in perpetuity through a future UK/EU Free Trade Agreement.

So far the EU has backed him. The stakes for Ireland and the UK are very high: in a major paper published today by Global Britain and written by Ewen Stewart and myself entitled The Irish economic miracle – fact or fiction?, we show how Ireland benefits from exploiting bona fide arrangements in the international structure for corporate taxation and the freedoms of the EU, and by how much.

The losers are the UK, the other main EU Member States and the USA.

Ireland’s main economic indicators infer a miracle: annual GDP per head at US$78,800, second only to Luxembourg in the EU and some 40% higher than the Eurozone as a whole, and GDP growth of 39% since 2005, double the UK rate and three times the Eurozone average.

Ireland went through a €85bn financial bailout in 2010 but has rebounded dynamically compared to other bailout countries like Greece, Portugal and Cyprus.

Ireland’s economy is a two-speed one, composed of a sluggish onshore one, based on agriculture, manufacturing and a portion of services, and then the offshore one – handling huge financial flows that come into Ireland and go out again. This part has boomed, is the engine of GDP and employment growth, and is based on Ireland having created a tax-advantaged ‘flag of convenience’, whose benefits to its users go far further than the misunderstood low headline rate of Corporation Tax of 12.5%.

Ireland is increasingly using a series of structures for international companies to dog-leg revenues and profits through Ireland that relate to economic activities primarily in other EU Member States, but in non-EU countries as well. The structures are legal, but have the effect of shifting jobs and investments, revenues and profits into Ireland, leaving more menial activities to be carried out in the other countries, minimising their income and social taxes, and Corporation Tax takings. In other words, Ireland’s model works to the detriment of the UK’s and others’ exchequers, and this detriment is one of the significant hidden costs of UK membership of the EU, its Customs Union and Single Market.

So great is the scale of the operation that we estimate that €130bn or 40% of Irish GDP can be accounted for by ‘flag of convenience’ activity.

Once it becomes apparent how significant these distortions are, it is clear why Ireland needs the UK to be fully aligned to its economy. This does not serve UK interests, however.

Were the UK to diverge from EU rules and defend itself against these practices, there would be no advantage for the likes of Apple – which routes over €100bn of its annual revenues through Ireland  – or Google and Dell to dog-leg their UK business through Ireland.

Very few of the sales are for goods, and indeed an even smaller proportion are for goods that need physically to move across the Ireland/Northern Ireland border. The overwhelming proportion of the sales are of services and of licence fees for usage of intellectual property. Ireland’s model deserves to be severely challenged, as it is an example of dog-legging business through Ireland for no other purpose than tax management. Global GDP is not increased or decreased by one cent, but the Irish government is getting a disproportionately large slice of the pie. That slice is being taken directly off the plates of other countries, with the UK in the front rank.

Raising the claim that that regulatory alignment is required to meet the terms of the Good Friday Agreement – and putting the issue of a ‘hard’ border on the island of Ireland so high up the negotiating agenda – are both convenient red herrings, obfuscating the scale and substance of the trade that Ireland is seeking to protect.

Ireland’s ‘flag of convenience’ model is challenged by any form of Brexit, particularly by a “No Deal” one and explains why its government has been so willing to work on the EU’s behalf to frustrate and deny Brexit in any meaningful sense. It’s called a vested interest and it’s high time we all recognised that.